Monday, July 11, 2011

The Debt and Deficit Debate

So, the powers that be in Washington had a gruelling 75 minute meeting to discuss the future of our nation's finances and came away empty handed. Well, we didn't expect our leaders to actually govern did you?

The problem is the Democrats and Republicans are fighting over numbers that really make little difference over the long-run. Four trillion? Three trillion? These numbers are just (unfortunately) a drop in the bucket.

Here's the scariest bit of data you'll read today: All of the current debt/deficit projections are being made assuming an average 2.5% Fed Funds rate (basically the interest cost of the government's debt). However, the problem is that over the last 30 years the average Fed Funds rate has been about 5.7%. If we just return to an average interest rate the total interest costs would skyrocket by $4 trillion over the next 9 years. This would more than wipe out any "savings" produced by these gruelling 75 minute meetings in Washington.

Here's what I expect will happen: There will be some form of compromise later this week (which will undoubtedly send the computers into full blown buy mode) "cutting $2 to $3 trillion from the projected deficits over the next 10-20 years. The biggest problem I expect with this "deal" is that it will probably be back-end loaded. Both parties will celebrate this austerity and they will quietly raise the debt ceiling by $2 trillion.

Why is that number important?

Well, surprise, surprise guess how long that $2 trillion will last us? Just long enough to get through the next election (sometime in early 2013 we'll be having this discussion again).

While, I'm on the subject of the politics infecting our national fiscal situation, I thought I should note that hypocrisy comes from both parties.

1) "The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally."

Sen. Barack Obama - 2006

2) Ah, but the flip flopping goes both ways.

Rep. Boehner, Rep. Cantor, Sen. McConnel and Sen. Kyl (all Republican leaders) voted to raise the debt ceiling 5 times from 2002- 2007 hiking the limit by almost $4 trillion. Hmm, I wonder who was President when they were for it before they were against it?

Both parties are in the wrong here. Republicans have become low-tax addicts that can't grasp the fact that we have a REVENUE problem (not enough taxes). Democrats have lost sight of the fact that SPENDING is truly out of control.

We've flirted with third parties in the past - Ross Perot, The Tea Party - but these have never been serious operations. I'm hopeful that this latest debt debate will draw some true centrists out of the wood work and maybe we will get a Bloomberg style third party to run nationally in 2012.

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